This case concerns a contract for the supply of equipment by a manufacturer in an East European State, Y (claimant) to a South Asian State, X (respondent).

'A. Legal framework

93. The Contract does not per se provide an indication of the methodology to be applied by the Arbitral Tribunal in determining the governing law, nor have the Parties otherwise agreed to a method by which the Arbitral Tribunal should determine the governing law. Both Parties have argued in their submissions, however, that the Arbitral Tribunal should resolve the question of governing law by determining the country with which the Contract is most closely connected. In addition, the Parties recognize that the Contract in question has elements which demonstrate a certain connection with both [State X] and [State Y], and acknowledge that the terms of this Contract extend beyond the supply of goods, providing also for the provision of services.1

94. As the Contract specifically stipulates that "all disputes arising in connection with the present Contract shall be finally settled under Rules of Conciliation and Arbitration of the International Chamber of Commerce", the ICC Rules must be looked to in examining the question of governing law. Articles 17(1) and (2) of the ICC Rules of Arbitration, in force as of 1 January 1998, provide that:

Applicable Rules of Law

1

The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.

2

In all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages.

95. Thus, the ICC Rules do not require the arbitrators to use any particular conflict of laws rules to select the applicable law. Rather, the ICC Rules give arbitrators broad discretion in determining the applicable law.

96. As the seat of the arbitration is Paris, it is also useful to point out that French law on the subject is consistent with the ICC Rules in that it also accords arbitrators wide discretion to determine the applicable law. Article 1496 of the New Code of Civil Procedure provides:

The arbitrator shall determine the dispute in accordance with the rules of law chosen by the parties; where the parties have failed to make such a choice, the arbitrator shall settle the dispute in accordance with the rules of law the arbitrator deems appropriate.

In this regard, the arbitrator shall have regard to relevant trade usages.2

97. The Parties have agreed that the Arbitral Tribunal has wide discretion in determining governing law.3 Accordingly, the Arbitral Tribunal may apply any method for determining the applicable law, including the direct choice method. (The Arbitral Tribunal may also have regard to choice of law rules, but resort to such rules is not imperative.) The Tribunal shall also take into account the provisions of the Contract and relevant trade usages.

B. Analysis

98. The Arbitral Tribunal has considered the provisions of the Contract and has had regard to the various international conventions cited by one or both of the Parties. Although not directly applicable to the present circumstances, these conventions nevertheless serve as evidence of recognized international principles applicable to choice of law issues. Based on these considerations, the Arbitral Tribunal has determined that the law of [State Y] governs the Contract. The reasons for this decision are set forth below.

1. The Nature of the Contract

99. Before analyzing the actual provisions of the Contract, it is necessary to understand the overall nature and purpose of the Contract. In this regard, the preamble to the Contract states that [State X] "wishes to purchase from [State Y] [equipment]".4 The preamble to the Contract further states that [Claimant] "is a developer, manufacturer and supplier of [equipment], performs its post-sale servicing, supplies the equipment necessary for the purpose and renders appropriate services" and that [Claimant] "is willing to sell and deliver to [State X] [the equipment], its associated equipment and render related services".5

100. It is clear from the above passage that the Contract is, in essence, a Contract for the sale of [equipment]. The provision of related services is but incidental to the sale of [equipment]. This conclusion is further supported by the allocation of the contract price between the [equipment] on the one hand, and related services on the other hand. Pursuant to Clause 3.4 of the Contract, the total value of the Contract without discounts amounts to US $220,660,125. According to Clause 3.4.1, the Cost of the [equipment] amounts to US $211,680,120 of the total value of the Contract. Although the customer was granted a special discount, even after the application of such discounts the Cost of the [equipment] still represents over 90% of the value of the Contract. According to Clause 3.5, following the application of the requested discounts, the Cost of the [equipment] amounts to US $115,000,000 (or 93% of the Total Cost) and the Total Cost of the Contract amounts to US $123,980,005. Accordingly, it is clear from these figures that, despite being a Contract for the provision of [equipment] and services, such services constitute only a small portion of the total contract price and must be considered as secondary to the principle objective of the Contract, i.e. the sale of [equipment].

101. The Respondent has argued that, considering the service life of the [equipment] is 20 years, the actual sale of the [equipment] is only a short-lived aspect of the Contract, and that the ongoing obligations of services are thus key to determining the place of performance. However, as noted above, the Tribunal finds that it is clear from the totality of the Contract that it is, in essence, a Contract for the sale of [equipment]. The provision of related services and training is but incidental to the sale of [equipment].

102. For example, Clause 2 of the Contract sets out the "subject" of the Contract. In addition to the delivery of [equipment], pursuant to the terms of the Contract as summarized in Clause 2, the Supplier . . . is to provide the following services: 1) Inspect the [location] planned for the stationing of the [equipment] in [State X] (Clause 17); 2) train the Customer's [personnel] in [State Y] (Clause 20); 3) receive the Customer's quality inspection team in [State Y] (Clause 11) and, 4) provide the services of the Technical Support Team in [State X] (Clause 12) (for a period of three or six months depending on the specialist in question).6

103. Some of these services are to be performed in [State Y] and others in the [State X]. However, the services described as being the "subject" of the Contract will not be performed throughout the 20 year service-life of the [equipment]. Rather, they are services which are inextricably tied to the delivery of the [equipment] and the short-term follow-up thereto, in order to ensure proper use of the [equipment]. This can be seen from Annex 4 to the Contract which shows the "Delivery and Services Schedule" to the Contract. No services are indicated as being provided beyond a period of twenty-eight months from the Effective date of the Contract.7 In fact, as stipulated by Clause 13.1 of the Contract, the services which are to be provided during the course of the service life of the [equipment] are to be dealt with in separate contractual documents,8 and are thus not even covered by the terms and prices set out in the Contract.

104. Thus, this Contract must be seen as primarily one for the sale of the [equipment].

2. Key Provisions of the Contract

105. The Claimant argues that, based on the terms of the Contract, the Contract is most closely related to [State Y] and that, accordingly, the law of [State Y] should govern the Contract. In this regard, the Claimant emphasizes that the [equipment was] manufactured in [State Y] and that delivery of the [equipment] occurred in [State Y] as a result of the use of the Incoterm, "C.P.T." or "Carriage Paid To". On the other hand, the Respondent argues that, based on the provisions of the Contract, the Contract is more closely related to [State X] and, as a result, the law of [State X] should govern the Contract. In support of this argument, as noted above, the Respondent emphasizes that the Contract involves not just the sale of [equipment], but rather, the provision of services, and that under the Contract many of the long-term obligations must be performed in [State X].

106. As set out above, the main purpose of the Contract is the sale of [equipment], the training and supply of associated equipment being only ancillary to the sale of the [equipment itself]. Thus, while it is true that the provision of certain services, such as training, occurred in both [State X] and [State Y], the Arbitral Tribunal places great weight on the fact that the [equipment], the sale of which was the fundamental purpose of the Contract, were manufactured in [State Y] by a [State Y] company and were required to be compliant with [State Y] standards.

107. Furthermore, as a result of Clause 3.2, delivery of the [equipment] is deemed to have taken place in [State Y]. Specifically, Clause 3.2 states "The [equipment] as per Annex 3 hereto shall be delivered CPT "Carriage Paid To [airport in State X]".9

108. The Parties have agreed that "CPT is a recognized INCO term, and that [it] is part of trade usage, so [the] Arbitral Tribunal can rely upon" the definition of CPT in the Incoterms.10 Incoterms 1990, the Incoterms applicable at the time of the negotiation and execution of the Contract, provide:

Carriage paid to… "means that the seller pays the freight for the carriage of the goods to the named destination. The risk or loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to buyer when the goods have been delivered into the custody of the carrier.11

109. Thus, when the CPT Incoterm applies, as in the Contract, the "delivery" of the goods occurs when the Seller delivers the goods into the custody of the first carrier for transportation to the named place of destination. The transfer of risk from Seller to Buyer takes place when the goods are delivered into the hands of the entity trusted with carriage of the goods. In this case, as set out above, the [equipment was] delivered to the transport aircraft at airports in [State Y] with "Carriage Paid To" [city in State X]. Accordingly, delivery took place in [State Y], and the Respondent assumed all risk from this point forward.12 That the place and date of delivery was [State Y] is further reinforced by Clauses 5.2 and 5.10 of the Contract which state:

5.2. The date of the International Airway Bill shall be considered the date of delivery of the [equipment]

5.10. The right of property in the [equipment] and the risk of their accidental damage and loss shall pass from the SUPPLIER to the CUSTOMER from the date of the International Airway Bill.13

110. As for Clause 5.3 of the Contract, cited by the Respondent and quoted above, the Arbitral Tribunal understands this clause to refer to acceptance by the Buyer as to the number of cases and weight of shipment specified in the International Airways Bill and not to the delivery of the [equipment itself]. The date of this delivery is the date of the International Airways Bill itself, as set out in Clause 5.2 of the Contract, discussed above.

3. The Relevant International Conventions

111. In making a determination regarding the applicable law, even though [State Y] and [State X] are not signatories to the International Conventions cited in the Memorials, the Arbitral Tribunal nevertheless had regard to the relevant international conventions as evidence of trade usages and internationally recognized principles applicable to conflict of law issues. This approach is comforted by the fact that the Parties have endeavored to support their cases by advancing arguments based on the same international conventions. This being said, the Arbitral Tribunal notes certain inherent limitations of the conventions cited by the Parties in their Memorials in terms of relying on the conventions as an aid in determining relevant trade usages.

112. In particular, Article 2(e) of the Vienna Convention clearly states that the Vienna Convention does not apply to sales of [equipment]. Accordingly, although the Vienna Convention generally assists in determining trade usages, its instructive value is restricted by the factual circumstances of the case. Similarly, Article 1 of the Hague Convention also states that the Hague Convention does not apply to sales of [equipment].14

113. As the Rome Convention does not contain a similar exclusion regarding sales of [equipment], and the "arbitration exclusion" only relates to an arbitration clause itself and not the rest of the contract, the Rome Convention is the most appropriate convention for the Arbitral Tribunal to consider in ascertaining applicable trade usages.

114. Articles 4(1) and 4(2) of the Rome Convention provide as follows:

4(1) To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

4(2). Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the Party who is to effect the performance which is characteristic of the contract has, of the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated. (Emphasis added)

115. As pointed out by the Respondent, pursuant to Article 4(5) of the Rome Convention, the presumption contained in Article 4(2) is rebuttable:

4(5). Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.

116. Accordingly, under the Rome Convention, unless it appears from the circumstances as a whole that the Contract is more closely connected with another country, the Contract will be considered to be "most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration".15

117. Thus, it would first be necessary to determine what is the characteristic performance of the Contract, and then to determine in which country the party that effects this characteristic performance has its central administration. (It is important to understand that the language of Article 4(2) of the Rome Convention bases the relevant presumption as to the applicable law not on the place of characteristic performance, but rather on the place of the central administration of the business entity that [e]ffects the characteristic performance.) Finally, it is necessary to determine whether the presumption established pursuant to Article 4(2) should be disregarded in light of the totality of the circumstances.

118. The Arbitral Tribunal has already determined that the Contract is, in essence, a Contract for the sale of [equipment] and it is this sale (and not the payment of money for the sale) which is the "performance characteristic of the contract". For sales contracts, where the vendor is a "body corporate", as is the Claimant, Article 4(2) of the Rome Convention points to the law of the country where the party which has effected this characteristic performance has its central administration at the time of the conclusion of the Contract. In this case, it is [State Y]. Thus, the Contract is presumed to be most closely connected with [State Y].

119. Having regard to the circumstances as a whole and the provisions of the applicable Contract, the Arbitral Tribunal is of the opinion that the presumption in Article 4(2) should not be disregarded pursuant to the terms of Article 4(5) of the Rome Convention. In the opinion of the Arbitral Tribunal, [State Y] is in any event the country with which the Contract in question is most closely connected, as set out above.

120. Based on the foregoing review of the Contract itself as well as the relevant trade usages applicable in the circumstances, the Arbitral Tribunal has determined that the law of [State Y] governs the Contract.'

<i>Dissenting Opinion</i>

'22. On the second preliminary issue, namely, the proper law of the Contract, the minority view is that it is governed by the laws of [State X]. This conclusion is reached by consideration of the terms of the Contract and the application of both the common law principles and the Rome Convention.

23. The true analysis of the Contract is that it not only incorporates a contract of sale but also incorporates a contract for the provision of services. In essence, the seller is not only selling the [equipment] but also providing services which will enable the purchaser to use the [equipment] as [vehicles] for their service life, namely, 20 years. They are designed by the seller to be used and intended by the purchaser to be used in [given situations]. The services not only include the provision of ancillary equipment and publications to be used to make the [equipment] operational but also to train [personnel] to [operate] them and engineers to enable the proper maintenance and servicing of the [equipment]. This is highlighted by the express agreement of the Parties in Clause 13.1 of the Contract to render further technical assistance and engineering services. The Contract taken as whole cannot be simply termed as a contract for sale of the [equipment]. The Contract is totally different from the sale and service of household apparatus, e.g. refrigerator or even a motor car.

24. The minority arbitrator feels that the matters referred to in sub-paragraphs I to XV of paragraph 49 in the Respondent's Second Submissions merit serious consideration as they consist of the main long term aspects of the Contract and which are essential to ensure the utility of the [equipment] to [State X]. These aspects are the key to establishing with which system of law the Contract has the closest and most real convection under the common law principles applicable in [State X] or to establish the characteristic performance of the contract under the Rome Convention.

25. The long term aspects of the Contract and the services cannot be simply viewed by comparing the cost of the [equipment] to the cost of the services. True it is that the cost of the [equipment] form[s] the majority of the sums payable under the Contact. The minority member of the Tribunal feel[s] that this is not the sole or relevant factor to determine the proper law of this Contract outweighing all others. This proposition can be tested by asking the question: will the [equipment] supplied be useable as [vehicles] without the provision of the ancillary equipment, spare parts and services such as training of [personnel]? The minority member feels that the answer must plainly be in the negative. The [equipment] costing US$115 million will be totally useless without the ancillary equipment and the services agreed to be provided under the Contract. Therefore, the cost of the [equipment] cannot be the determining factor of the true nature of the Contract.

26. Considering the Contract in this light, the minority member concludes that applying the comrnon law test the Contract has its closest and most real connection with [State X] law and it is that law which should govern the Contract.

27. Turning to the Rome Convention, the minority member accepts that this is another method by which the Arbitral Tribunal can determine the proper law of the Contract. It is also accepted that if the law of the seat of the arbitration were used to determine the proper law, the Rome Convention would apply.

28. Art. 4(1) of the Rome Convention states that "To the extent... the contract shall be governed by the law of the country with which it is most closely connected". To establish "the country with which it is most closely connected" Art. 4(2) relies upon certain presumptions. The place of residence of the Party effecting the performance which is "characteristic of the contract" determines the proper law. Art. 4(1) continues: "However, if the contract is entered into in the course of that party's trade . . . that country shall be the country in which the principal place of business is situated or where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which the other place of business is situated"(Emphasis added).

29. There is no doubt that the Claimant entered into the Contract in the course of its trade and that its principal place of business is in [State Y]. It is also clear that the supply of the [equipment] and the services to be provided in respect of them under the Contract are to be provided by the Claimant. Therefore, applying the first part of Art. 4(1), the presumption would be towards the laws of [State Y]. However, the minority member feels that this would not be the proper approach in this case for two reasons: first, it is clear that in order to perform the Contract, the Claimant was obliged to set up a base of operations in [State X]. Secondly, by the application of Art. 4(5), the presumption must be disregarded.

30. Many express terms of the Contract require the Claimant to establish a base of operations in [State X]. See Clauses 2.2 read with Annexes 10 and 27, Clause 12 read with Annex 10, Clauses 2.7 and 17.1 to 17.7, Clause 4.2 to 4.4, Clauses 5.1 and 5.3, Clause 9.1, 9.9 and 9.12, Clauses 13.1 to 13.4 and 14.1 to 14.4. The minority arbitrator feels that this performance by the Claimant of its contractual obligations in [State X] through a place of business there brings the Contract closer to [State X] than the principal place of business under Art 4(1). This analysis would also be consistent with the provisions of Rules 17(1) and (2) of the ICC Rules.

31. Even if the presumption under Art 4(1) points towards [State Y], the minority member takes the view that by operation of Art 4(5), that presumption must be disregarded. This follows from the factors already established that "it appears from the circumstances as a whole that the contract is more closely connected with another country". That another country is [State X]. Therefore, on analysis, even if the initial presumption is towards [State Y], that presumption is displaced in favour of [State X] by operation of either the final words in Art 4(1) or under Art. 4(5).

32. Therefore, it is concluded by the minority arbitrator that whichever approach is taken to determine the proper law of the Contract, on analysis it points towards the laws of [State X]. Accordingly, the minority arbitrator would so direct.'

1
Transcript of the Preliminary Issues Hearing...

2
New Code of Civil Procedure, Article 1496: "L'arbitre tranche le litige conformément aux règles de droit que les parties ont choisies ; à défaut d'un tel choix, conformément à celles qu'il estime appropriées. Il tient compte dans tous les cas des usages du commerce."

3
Transcript of the Preliminary Issues Hearing...

4
Contract, Preamble...

5
Ibid.

6
Contract, Clauses 2.1 -2.5... Regarding the Technical Support Team, see Contract, Clause 12.3...

7
Contract, Annex 4(2)... The Effective date of the Contract is "the date, confirmed by appropriate letters exchanging [sic] by the Parties". (See Annex 4(2)...)

8
See Clause 13.1...: "The SUPPLIER according to the CUSTOMER's indents [sic] shall render technical assistance and engineering services to the Customer's specialists by his highly qualified specialists ... during the calendar life of the [equipment] to help the CUSTOMER in solving the matters that may arise out of the [equipment] operation and maintenance.The said assistance and services shall be rendered at the CUSTOMER's expense on terms and conditions agreed upon and fixed by the Parties as separate contractual documents."

9
Contract, Clause 3.2...

10
Transcript of Preliminary Issues Hearing...

11
"CPT" in /CC Incoterms 1990 (Paris: ICC Publishing, Publication no. 460, ISBN 92-842-0087­3, 1990), pp. 56, 57.

12
Contract, Clause 5.2 and Clause 5.10...

13
An "International Airway Bill" is a Bill of Lading that is used in relation to carriage by air. It is a receipt issued when the goods have been received for carriage, i.e. it is issued in the country in which the goods are loaded on the carrier for transport to the destination.

14
Article 1 of the Hague Convention states: "This Convention shall apply to international sales of goods. It shall not apply to sales of securities, to sales of ships and of registered boats or aircraft, or to sales upon judicial order or by way of execution. It shall apply to sales based on documents."

15
Rome Convention, Article 4(2).